Sunday, March 30, 2008

Well people have voted in Zimbabwe and the results are suddenly delayed. This election is between a guy who has led Africa's most productive nation into a basketcase of 100,000% inflation and black markets for basic goods and one of his main opponents and a rising party insider. Either way the fact that mass protests broke out across the country is a positive sign that the ruling party is hopefully on the way out, or at the least Mugabe will be gone. Stay tuned for more updates.

Friday, March 28, 2008

Today some big economic news came out which most americans will not hear since it does not involve a prostitute, a governor, or Paris Hilton's hair. First, consumer spending is down yet again this last month. The 0.1% increase is negligible due to the effect of inflation, so consumer spending is lower on magnitude. This means that more money is going to pay bills and buy food instead of buying that Ipod or designer clothes. Anyone who has gone shopping for groceries can see that inflation is definitely on the risse. Eventually the huge retail sector is going to crash since wages have been stagnant for years, while energy and food prices have flown.

Also, the economic conservatives at the Fed have decided to infuse more money into banks hoping to stave off a recession. This is a bailout by any measure, forcing you and I(and every other taxpayer) to subsidize the poor lending practices of banks. The same people who praise this move now can be seen talking about the need for failing businesses to be taken out when times are good. It's a horrible waste of money and creates more debt which brings down our economy over time by having foreigners purchase the bonds to finance said debt.

Wednesday, March 26, 2008

In the over consuming society we live, numerous examples of this problem exist. The most basic idea for this comes from the "diamond and water" paradox. It asks why water, the basis for all life on Earth is nearly free, while diamonds for jewelry--which serve no practical function, cost thousands of dollars. Simply, the reason is scarcity, as diamonds exist in smaller quantities and as such the demand is relatively inelastic(closer to a vertical line) while water is more elastic(closer to a horizontal line).

In simple terms, that means that the more diamonds are on the market, the demand is roughly the same so price does not move. Water on the other hand has such a nearly fixed price that creating new methods of obtaining it does not change the price by much. Water cannot ever be free, however, as price acts as a regulator of behavior. At a price of zero, waste is rampant, as occurred during free water projects in Africa in the 1990s.

What does this mean?It means that the higher interest rates are, the lower the amound of money needed in the market at that time, which results in either the money supply shrinking(deflation) or interest rates(IR falling) to allow borrowing of money at the level the market demands. Conversely, in a situation where the IR is dropped below the efficient level(E), the quantity demanded is greater than the supply of money, so either the money supply increases(inflation) or IR rises to get closer to equilibrium. Guess which one is the current situation and which one was the situation in the 1970s...

This morning I have been seeing on all the news outlets that the Fed is going to cut the Discount Rate 1%. This rate mainly affects the interest on money lent from the Federal Reserve to financial institutions, but it has the effect of lowering the value of the dollar because it increases the quanitity demanded for money but lowers the demand below equilibrium. In other words, more money is used by the people in the American economy, but the interest rates do not rise to prevent inflation, resulting in more dollars chasing fewer goods.

Sunday, March 16, 2008

Late tonight the news sources are reporting that Bear Stearns is having a firesale, with its shares being bought out for $2 a share. Besides the impact on the broader market that one of its key players has fallen in short order, it could bode poorly for many other big financial firms who also leveraged heavily during the housing crisis and then invested their money into mortgage-backed securities.

"This is about credit being overextended, and how bad it is for majorfinancialinstitutions and for individuals. This is why we're probablyheading into arecession." -- Peter Dunay, chief investment strategistfor New York-basedMeridian Equity Partners.(from the linked article)

Further, the Federal Reserve lowered the Federal funds rate one quarter of a percent to 3.25 percent. This is an emergency cut, with another cut probable at the Tuesday meeting. The results of the cut and firesale of Bearn Stearns so far have been a drop in the Asian markets and rising gold prices. Gold has been over a thousand dollars an ounce for the first time, though still below the inflation adjusted levels seen during the Eighties.

With the declining dollar value, commodities pricing has risen dramatically, which has been seen in gas price rises and a rise in the cost of food. Since the CPI-core rate does not take into account these "volatile factors" exceluded, the media reported CPI rate of inflation is often lower than the real inflation rate felt by consumers. That will be discussed more at a later time, as this is enough to digest for one night.

Saturday, March 15, 2008

On Friday the Zimbabwe teachers ended a strike after a 745% raise. They are now paid 3.4 BILLION Zimbabwean dollars a year, which amounts to over a hundred dollars US annually on the black market exchange rate. Periodically more stories about the hyperinflation brought about by printing money to cover debts will appear, to illustrate the final product of unsound fiscal and monetary policy.

The sound you hear in the distance is the sound of your money losing value by the minute. Helicopter Ben is preared to throw some more paper at the economy in hopes of increasing stock prices come Tuesday. Of course there are always economists trotted out whenever an irrational move by the Fed comes to play up the importance of Helicopter Ben's latest paper deluge. Today's comes from the article linked above:

The Fed's rate cuts have added to the downward pressure on the value of thedollar, which recently plunged to a record low against the euro and has fallensharply against the Japanese yen. The drooping dollar is stoking fears thatinflation might take off. The weaker dollar could raise the cost of importedgoods entering the U.S. and lead American companies to raise prices asforeign-made products become more expensive.

To Hoffman, that is a case for going with the half-point rate reduction. Other analysts believe the situation is so dire that the Fed must cut deeper. Brian Bethune and Nigel Gault, economists at Global Insight, are among those predicting a three-quarter point reduction. Given the turmoil on Wall Street, there even is a chance of a 1 percentage point cut, they said.

Note that nobody says that perhaps cutting rates the first couple of times did not work so let's not further devalue the dollar again. To quote a famous saying "the definition of insanity is doing the same thing over and over and expecting different results. Oh well, tell me what you think.

While the nerds of the world celebrated Pi Day, a few interesting things leaked out from the world of economics. In an upside down world, the House is considering increasing the number of H1-B Visas. This would be fine thing to do in a time when say, the economy is growing and unemployment is not a major fear driving down the market. Instead, this measure, if passed, will increase the number of "speciality" visas for people with IT and research experience. If you wonder why some major corporations' IT departments resemble a Bollywood premiere, think H1-B.

In better economic times we here at the Invisible Boot would support such a measure, but like the Croesian spending from the Congress, and the Polyanna economics of the Fed, such a measure finds itself in the wrong place at the wrong time. Instead, the massively bloated research budgets at universities and in the public sector should be training domestic help while it is becoming more readily available, instead of substituting cheaper foreign labor at the expense of equally qualified American labor.

Basically, Barack Obama's pastor, Jeremiah Wright, seem to have some belief that "white America" is responsible for all the wrong in the world and that the US is responsible for everythign wrong in the world. Some of the comments by Wright include: "No, no, no, God damn America, that's in the Bible for killing innocent people. God damn America for treating our citizens as less than human," and "Barack knows what it means to be a black man to be living in a country and a culture that is controlled by rich white people." Such shallow viewpoints have no place in this modern world, and hate-mongering against people for the color of their skin leads to situations such as the economy of Zimbabwe and the Apartheid government in pre-1994 South Africa. To his credit Barack has stated that he does not agree with the views given in the sermons, but they still present troubling issues with what he believes if he attends a church where such drivel was once spewed.

Economics:

Ben Bernanke, also known in this blog as ''Helicopter Ben," today showed how much the Fed favors the self regulation of the market by bailing out failing mortgage banker Bear Stearns. In its enlightened judgement, the Fed has decided to allow a failing lender to continue operating even though said lender brought about its financial problems through lending in a manner that would make a drunken sailor blush. Such a development comes only days after the Fed secured hundreds of billions of dollars in securities to banks and brokers to keep lending and collateralized these securities with mortgage portfolios. Here at the Invisible Boot we like to summarize things to make them easier to understand so we translate economics into everyday language. Thus, what the Fed did was lend "money," which taxpayers will pay back as interest payments on the bonds, to mortgage brokers who used debt as collateral. This is like paying off the credit card with another credit card and then making twenty other people pay both. The end result of such policies comes from future higher tax bills and devaluation of the dollar, which is already reaching historic lows.

Today I am launching my simple blog to discuss in a simple and straightforward manner two of my favorite things: Economics and Politics. Feel free to join the discussion and the only rule is to comment with an open mind. Let the ideas flow!

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The Invisible Boot is a site for the day's economic and political news delivered in a straightforward and easy to understand manner. Feel free to comment on anything you like, and especially on anything you dislike.